Why the 27 are taking a hard line on Brexit

Insight
03 October 2016

Britain’s partners have forged a common response to the forthcoming Brexit talks. Given their tough line – refusing ‘pre-negotiations’ and insisting that Britain cannot have the single market without free movement – how should Theresa May’s government respond?

The British government knows that the Article 50 exit procedure was designed to put the country leaving the EU at a disadvantage. So, prior to invoking the article, its envoys have been urging other EU governments to give some indication of which demands would be acceptable to them; they don’t want their opening bids to be shot down as soon as the procedure starts. But the 27 – fearing that British diplomacy may sow divisions among them – have refused any ‘pre-negotiation’. In the words of one senior German official, “we tell the British, ‘too bad, you’ll have to take your chances’.” Once the article is invoked, the British will have to negotiate with the European Commission, though the Council of Ministers, representing the member-states, will watch it closely.

The two years prescribed by Article 50 will weaken the British hand. The clock will be ticking when Britain seeks to complete not only the exit talks, but also an interim agreement covering the period between when it leaves the union and the entry into force (probably many years later) of a free trade agreement (FTA) between the UK and the EU. The UK will also have just two years to become a normal member of the World Trade Organisation (WTO), and to negotiate bilateral deals with the 53 countries with which the EU has FTAs, which will cease to apply to Britain on the day of Brexit (see ‘Theresa May and her six-pack of difficult deals’; technically, the two-year period may be extended, but only if the 27 agree to do so unanimously, and they will not). If these talks break down or Britain leaves the EU without having completed these agreements, the British economy would take a very big hit.

On recent visits to Berlin, Brussels, Paris and other EU capitals, I have been struck by the largely united approach of the 27 to the Brexit negotiations. They assert that if Britain restricts free movement after it has left the EU, it cannot be part of the single market. Instead, they suggest, it should negotiate a free trade agreement with the EU, along the lines of that between the EU and Canada. This could be very damaging to Britain’s services industries, including those in the City of London, since FTAs do not normally cover many services.

Boris Johnson, Britain’s cavalier foreign secretary, recently said that suggestions of a link between single market access and freedom of movement were “complete baloney…the two things have nothing to do with each other.” Britain’s partners think he is talking baloney. Wolfgang Schäuble, Germany’s finance minister, offered to give Johnson lessons on how the EU works and to send him a copy of the treaties.

British eurosceptics are onto something when they point to the EU’s inconsistent commitment to the ‘four freedoms’ of goods, services, capital and people. The liberalisation of services has been only partial, partly because of Germany’s reluctance to open up its own service industries and restricted professions.

But that will not help the British, because the indivisibility of the four freedoms is a mantra that European leaders believe in. British negotiators need to understand why the 27 are taking such a tough line on the four freedoms. Their obduracy is based on more than the attachment of EU politicians and officials to conservative, traditional thinking. There is a real worry that if the British achieve some special status, with their own institutional arrangements, other countries – inside or outside the EU – might ask for equivalent deals. And that could undermine existing institutional structures, to which the Commission and the European Parliament are especially attached, and possibly even lead to an unravelling of the EU.

The biggest reason why most governments take a tough line on the four freedoms is their fear of populism. Thus in Paris, mainstream politicians do not want Marine Le Pen to be able to say: “Look at the Brits, they are doing fine outside the EU, let’s follow them there”. Similar views colour thinking in The Hague, Rome and many other capitals. So the British must be seen to pay a price for leaving. They cannot be allowed to enjoy the benefits of membership, like participation in the single market, without accepting the responsibilities, like paying into the EU budget and accepting free movement (which both Switzerland and Norway do).

I found a strong consensus for this hard line in EU capitals. Many governments adopt a softer tone than the French, the Commission and the Parliament, but they differ little on substance. The British government needs to take MEPs very seriously. They must approve both the Article 50 agreement and the FTA governing future relations between the UK and the EU. If by some feat of brilliant diplomacy, Britain were to negotiate single market membership combined with limits on free movement, MEPs would certainly throw out the deal.

So the extraordinarily harsh reaction in most EU capitals to the recent and much-discussed Bruegel paper is not surprising. Written by a group of respected thinkers – including Jean Pisani-Ferry, head of policy planning in the French government, and Norbert Röttgen, chairman of the Bundestag foreign affairs committee – the paper proposes a ‘continental partnership’ that would give Britain (and potentially others) membership of the single market, the right to be consulted on its rules, and the ability to limit EU migration. In return Britain would have to accept rulings of the European Court of Justice (ECJ) and pay into the EU budget.

One principle underpinning the Bruegel paper is that it is in the interests of the 27 to have as close as possible an economic relationship with the UK; another is that, in economic terms, absolute free movement of people is not necessary for the good functioning of the single market. But EU governments do not necessarily accept either premise. When I asked a senior German official if he agreed that it would be good for Germany for the UK to be as closely integrated as possible, he demurred. He said that a bad deal for the British would divert foreign investment from the UK to Germany. As for the second premise, German and other officials point out that one cannot have free movement of non-tradeable services (like hair dressers, nurses and teachers) unless labour is free to move around the single market. In any case, a British government would probably be unable to accept either EU budget payments or ECJ rulings (as the Bruegel scheme would require), since many of those voting for Brexit did so to be rid of them.

A lot of British politicians believe that the hard line of the 27 is merely an opening stance, and that once negotiations get underway, they will soften. Some Britons hope that the Americans will help. It is true that most American politicians favour a soft Brexit and will encourage the 27 to keep the UK as close as possible. But the US has little sway over the policies of most European governments.

Rather more Britons assume that, in the end, Angela Merkel will look after the UK. One French official told me that he worried that the Germans could go soft on the British. The Chancellor certainly laments Brexit and wishes Britain well. But her main responsibility, as the EU’s unofficial leader, is to keep the 27 together, and that means working closely with the French to do so. For Merkel, the interests of the EU come first. She believes that maintaining the institutional integrity of the EU, and the link between the four freedoms, is in Europe’s interest and therefore Germany’s. One friend of Merkel told me that if the French maintain a hard line she would not be able to soften hers.

Furthermore, British politicians should not assume that German policy is driven only by economic rationality. German industry would like a very close relationship with a post-Brexit UK, but does not necessarily determine policy. German manufacturers have spent the past two years lobbying against EU sanctions on Russia, without any impact. In any case, an FTA between the EU and the UK, removing tariffs on goods, would suit German industry. It would not be so good for the service-dependent UK economy.

A lot of British politicians urge May’s government to delay invoking Article 50, on the grounds that France and Germany have general elections next year, and that they may be more amenable to UK demands when new governments are installed. But in my view those elections will make little difference to the Brexit talks. Merkel is likely to remain German chancellor. And the next French president, whether Alain Juppé, Nicolas Sarkozy or someone from the centre-left, is likely to pursue the French national interest, which – in the views of the French elite – is to be tough on the British. (It is true that Sarkozy has floated the idea of a new EU treaty to lure the British back in, but any new treaty requires the accord of 27 governments, most of which, including Germany, think his scheme a mad idea).

One reason why British politicians may be over-optimistic about the kind of deal they can achieve is that many of them misread continental debates on migration. In the UK, everybody agrees that EU migration is a big political issue. British politicians tend to assume that people in other EU countries must think the same way; therefore, argue both Conservative and Labour MPs, the 27 will in time come round to Britain’s viewpoint and wish to restrict free movement. And that could, they hope, allow the British to achieve some sort of single market membership combined with limits on free movement.

It is true that migration is a big issue in many EU countries. But in most of them the salient problem is inflows of refugees and economic migrants from outside the EU. In Germany, for example, mainstream politicians do not see intra-EU migration as a big problem (though far-right politicians do, as is the case in France, the Netherlands and elsewhere). So British politicians should not count on their EU peers adopting their own views on migration.

Having listened to continental viewpoints, I have a few suggestions on how the British government should handle the Brexit talks. On migration, the British should not rush into a new system for restricting free movement without consulting partners (once Article 50 is invoked). Unilateral actions in this area would go down badly. One German official said that if the British decided to exclude only unskilled workers, with the result that many poor Romanians ended up in Germany rather than the UK, it would be seen as an unfriendly act. The longer the British delay announcing the details of their restrictions on free movement, the greater are the chances that they could choose a system that is tolerable to the 27.

More generally, the British need to sort out their priorities and not have too many of them. And if they really wish to pursue a hard-to-obtain objective like ‘passporting’ for the City of London, they will need to offer a substantial trade-off, such as payments into the EU budget (German officials told me that British offers to pay into the budget would not be a game-changer, but I suspect they would like some British money).

Finally, the British should be polite. Because Article 50 puts them in a weak position, they cannot hope for a good deal without the goodwill of their partners. An acrimonious divorce would damage both parties but be worse for the UK, since much more of the UK’s trade is with the EU than vice versa. Thumping the table and making threats – for example, to block EU defence integration or withhold budget payments – would erode the goodwill that Britain will depend on. Nor do inflammatory comments help, as when international  trade secretary Liam Fox recently said that the EU was “going to sacrifice at least one generation of young Europeans on the altar of the single currency, and you can only rip out the social fabric from so much of Europe before it starts imploding.” Theresa May must ensure that her ministers deal with their EU counterparts in a modest, sober and courteous manner.

Charles Grant is director of the Centre for European Reform.

You can also listen to CER podcast: Charles Grant on negotiating Brexit – priorities on both sides of the channel

 

Comments

Excellent, politicians on every side have pointedly ignored the role played by universities, and R&D and the 'digital economy' in this 'Brexit' process. There is abundant evidence that the EU market has the potential to be the world's deepest market for digital products and services by 2030. It is clear that the global behemoths [Google etc] understand this. It is equally clear that UK-based operations currently derive substantial advantage from ever-closer integration within the EU, and their markets [under 29] must remain EU-wide. They need the German and other governments to dilute the barriers to freedom of movement for protected professions if they are to grow their businesses. Their markets [under 29] also voted 'remain'. Why is the sector ignored? What framework can be created to increase the UK's participation in the EU, and preserve its acccess to R&D funding?
I'm not sure that an FTA between EU and UK is so important to Germany:
1. UK will have to get its imports from somewhere, so it is likely that a good portion of the 7.5% of German exports which go to Britain would still continue, despite WTO tarriffs.
2. WTO tarriffs would make British exports more expensive, creating an opportunity for German industry to out-compete Britain in other EU markets.
So, it essentially comes down to spite.
Britain must be punished for daring to no longer wish to be ruled by that lush Junker.

It says a lot for the EU that it will certainly try to hurt both the European & British people to keep their ailing project on track.

In truth though, this line of attack just accelerates their certain demise.


Man divorces faithful wife so he can pursue new girlfriends. Despite this, he demands free and open access to the old marital home, a share in the joint bank account and a continuation of his conjugal rights with his ex-wife. Is outraged she can't see the sense of this.
Brilliant analysis.
HMG may regard this as a poker game and think it has more options than it actually does have. Most EU27 leaders must think that whatever may have prompted the Brexit vote, its effect is simply to give populist Tory Brexiteers (not least our 'cavalier' Foreign Secretary -- I could think of other adjectives to describe him) the whip hand? The EU27 couldn't give them an inch. Added to this the demand (given weight by Ms May just yesterday) that the UK will never accept the rulings of the ECJ means not just that we can't continue to be part of the Single Market but that we can't even have access to it (on the grounds that it is the ECJ that adjudicates on regulations and if the UK won't abide by them, then there can be no access. The EU27 no longer owe the UK anything and have everything to lose from a compromise deal. Tory Brexiters, on the other hand, have everything to gain from there being no deal, including being able to blame the EU27 for the economic problems that even HMG now foresees as a consequence of Brexit.
The problem with modest, sober and courteous is that it flies in the face of domestic politics. Brexiteers have overpromised and need to continue to assert that they'll be immodestly successful. Worse, UKIP taught some Brexiteers that rhetorical flamboyance translates into political success at home. The next two years will be messy.
Britain is at its best when its back is against the wall. The political pygmies in The EU from the failed socialist Barosso to the drunken Junker, to the spite filled Barnier and the fool Selmeyer, demonsteate that Germany learned nothing from two world wars, and continues with its lackie France to repeat the disasterous duvide and rule politics of the past. The EU lacks the intellectual presence of mind to recognise it issigning its own death warrant in behaving like a spoilt child ti Britain. There has never been a more sincere and committed member of the EU than Britain, a gross contributor to the EU project for over 40 years, and after half a trillion pounds in helping to transform the EU all the UK receives is a kick in the teeth from 'so called' partners and friends. In fact what we see is a miserable socialist economic nightmare rising in Europe. A clueless cabal of paper pushers and functionaries exposed for being incapable of running 28 complex economies, making a complete hash of the Euro, and far from eradicating nationalist priorities in the false 'communitaire' mantra, France and Germany have used their own national priorities to drive policy in Europe like a steamroller, insisting the UK pick up the tab enabling France to refuse structural reform and enabling Germany to create vassal states of those stupid eniugh to be enslaved in the Euro. Sadly all the old mistakes of the last century are being repeated again. Euro denominated economies chained to Germany (as underwriter) will soon experience the horror of debt mutualisation and (even worse for many) every country in the Euro won't be having their budgets scrutinised by the European Parliament , rather Berlin will be doing the signung off. So following the second world war what PEACE have we actually achieved? The economic domination of Europe by Germany achieving what they failed to do in two world wars. Far from eliminating nationalism, the national interests of France and Germany dominate , soon the rest of Europe will wake up to that fact, by then many will be indebted to Germany and unable to object to German domination, a sad epitaph for europe. Britain is right to turn its back on Europe andface the world, with th Anglosphere, the Commonwealth and her determination not to be enslaved by the German project Britain will make a success of escaping the dead hand of the EU, it will be tough granted, but Europe will understand in time what the UK dud with Brexit was a necessary step change to avoid the loss of the British State one of the few nations able to challange authoritarianism and remain beacon of freedom and justice . The UK will survive and every spiteful childish attack by the EU on Britain will expose the EU as a dangerous malign and deeply unpleasant body politik manipulated by Germany and its apologist France. We are best out of this vipers nest to develop a new global role, as change in the EU is not possible so it must crumble under the weight of its own incompetence.
What a brilliant commentary of the current situation. What I don't understand is why so many politicians across the EU and in the UK haven't twigged it yet, or maybe they have their own noses so deeply in the "trough" that they simply don't care.

The EU demands that the UK pays them a "divorce" settlement, apart from the fact that this is of dubious legality anyway, they refuse even to attempt to quantify, or qualify, their demands - how can we be surprised by this since they cannot even get their own accounts signed off as " a true and fair reflection of their financial dealings".

It is time the the "25" woke up and asked Germany and France how the negotiations with the UK are going to benefit them.

You "27" should also take note that the UK is one of the few countries in the EU that actually does its best to comform with the EU's edicts on everything from environmental issues to state subsidy of its industry - for anyone with the guts to attempt to verify this, ask the Spanish, for example, where they are now with recycling, I can tell you, virtually non existent! Or maybe ask the French state for some information on their intrastat declarations made by their businesses. If the statistics concerning IntraEU trade have been compiled using these statistics I don't think I would believe them anyway!

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